If you are just starting your home search, you probably are wondering how to know the REAL prices homes will sell for. I often hear new home buyers and even those that have been searching for some time share their struggle with the “teaser pricing model” in the Bay Area.
A “teaser price” is the listed price of a property which is often FAR below the sale price. Depending on the area, this can be as much as 30% to 50% below the actual market value and/or sale price.
So, as a prospective home buyer, how do you roughly estimate the REAL sale price of a property you like or houses in the area(s) you are considering?
I have found there are two main variables that I consistently find are helpful in forecasting sale prices.
1) Recent comparable sales “Comps”
2) The level of interest in each specific home
Let’s talk a little bit about each of these.
Comps are recent sales of similar properties in a close proximity to the “subject property” which is the property of interest. Often, real estate agents provide buyers with what is called a Comparative Market Analysis which is basically a fancy name for a Pricing Report. Comps do provide guidance for what the estimated value of the subject property is. However, unless the subject property is a condo or townhome or track homes, there is generally material differences between the properties, so it’s not always apples to apples. Which means, that other factors like condition of the home, lot size, layout, parking, etc also need to be taken into consideration.
All that said, if you find a property for sale that you are interested in, you can simply search for recent comparable sales to get a better idea of the actual value of the subject property. For example, let’s say you are interested in a home on 123 Market St, Oakland which is listed for $749,000. The property has 3 bedrooms, 2 bathrooms and is 1,400 sq/ft. You can search for recently sold properties (within 6-12 months) that are located in close proximity ( ⅓ to ½ mile away from the subject property). The results that you get from this search, should give you a general idea or value range for 123 Market St. Does this make sense? Accurately estimating sale prices can get much more nuanced and complex, but this will give you a good starting point.
Two helpful metrics that comps provide us are:
- Sold Price Per sq/ft
- Sale to List Ratio
I will explain both of these to give you a better understanding.
Sold price per sq/ft = Final sale price divided by the total square footage of the home. Example: Final sale price is $1,000,000, square footage of the home is 1,600 sq/ft, the Sold price per sq/ft = $625.
Most online real estate websites (such as Redfin, Trulia, Realtor) will allow you to research the sold price per sq/ft of properties and will also provide you with the Median Sold price per sq/ft of homes in a neighborhood, zip code, or city.
I find that it is helpful to use the sold price per sq/ft to estimate property values in neighborhoods. Let’s say you are looking for homes in my neighborhood in Oakland, Temescal. I can find the median sold price per sq/ft which is $791. This tells me that a 1,000 sq/ft home is likely to sell around $800,000 and a 2,000 sq/ft home $1,500,000. Understanding the Sold price per sq/ft is one quick way to understand if the area(s) you are considering are within your price range.
Another helpful indicator is the Sale to List ratio…
Sale/list ratio = the percentage of the sale price to the list price. So, if a home was listed for $1,000,000 and sold for $1.200,000 the S/L ratio would be 120%. This is probably the quickest way to determine the “ACTUAL” prices of properties in a specific area. However, the Sale/List ratio can be very different depending on the neighborhood.
For example; the current sale/list ratio in Oakland, on the whole, is 114%. Compare this to the current sale/list ratio for Rockridge which is 150%. Researching sale/list ratio on the level of zip codes or neighborhoods is the most helpful way to give you a better estimate of prices in that area.
So, if a neighborhood has a 150% sale/list ratio like Rockridge. When a new listing comes onto the market in Rockridge at $899,000, using the sale/list ratio as a quick predictor, the estimated sale price would be $1,350,000. Now does it make sense why some of you may be getting so confused around pricing? It makes sense to me. If I go look at this house in Rockridge at $899,000 and think I have a shot at getting it, and start planning my lifestyle and future, where we’ll go out to dinner, where we will set up the couch, etc and then find out it’s likely going to sell $400k+ above the list price, I’m probably going to feel confused, frustrated and disappointed.
One advantage of working with an experienced, locally informed real estate agent is they can advise you on price. One of the many helpful services a good agent can offer you is to provide thorough pricing guidance. Especially in the Bay Area market, where estimating prices is part science and part art.
The second variable that influences sale prices is the LEVEL OF INTEREST in the specific property.
This factor is often not understood by those just starting their search. So, I’ll do my best to explain it so you have a better understanding from the get go. In the current market, many listings set an offer date or deadline. This is the date/time that the sellers will review any and all offers. Generally, the offer deadline is about 2 weeks from the date the property was listed for sale or first comes onto the market. This method of selling homes favors sellers by creating a quasi bidding system where the number of interested buyers can strongly influence the sale price. The number of buyers planning to submit an offer is typically not known until the day before the offer date.
How is the level of interest determined? Your agent can contact the listing agent (seller’s agent) and ask how many disclosure packets have been requested AND how many agents’s have confirmed that their clients are planning to submit an offer. As a very general rule of thumb, about ⅓ to ⅕ of disclosures requested will convert into offers. So, if a property has 20 disclosure packets requested, it will likely get 4-7 offers. If you are making an offer on a house, it is very important that your agent stays in close contact with the listing agent throughout the offer period to understand the level of interest in a property.
When I have client’s who are considering making an offer on a property, I provide them with a Comparative Market Analysis (CMA) or a Pricing Report. In this report, I give them an estimated price range that I predict the property will sell for based on the recent comparable sales. I also take into account the level of interest and explain that if the subject property has a low interest (no offers, or 1-2 offers) that the sale price could be on the lower end of the range I have estimated or even below. If the property has a really high interest (5, 10 or even more) offers are expected, the sale price will likely end up on the upper end of the estimated range or even above.
To give you a real-life example, I recently provided a “Pricing Report” to a client who was making an offer on a house. I estimated the comparable sales supported a value between $875,000 to $925,000 for the subject property. The property ended up getting 13 offers. My client offered $850,000 and the winning bid was $900,000.
In summary, if you are just beginning your search and/or you are trying to get a general idea of the prices in a particular neighborhood a few tips are to Research;
- The average sold price per sq/ft for properties in that neighborhood or zip code.
- The sold price per sq/ft for properties in the area that are similar in bedroom/bathroom count, square footage and condition to what you are hoping to buy.
- The average sale to list ratio in the city, neighborhood, and zip code.
Knowing these metrics can give you valuable information about pricing and help you make better decisions about where to focus your search.
There are a lot of free websites you can use to get this information. Redfin.com is probably the easiest to navigate with the best data. Trulia.com also has some helpful tools to research prices and neighborhoods. If you have another favorite site, then use that one.
I realize I have spelled out quite a bit of information here. Hopefully, this gives you a few more tools and resources to help you navigate pricing in this unusual Bay Area “Teaser Price” market.
There is a lot of value an experienced real estate agent can provide in helping buyers understand pricing, choose the right neighborhoods, and estimate sale prices. If you are a first-time home buyer, I understand it can feel overwhelming to navigate this process. If this information sparks further questions for you about pricing (or any other part of the home buying process), feel free to contact me directly.
I’m happy to be your First-Time Home Buyer Guide.